What’s up with the individual retirement account (IRA)? I seem to always be answering random questions. Like why this Roth guy gets talked about all the time? Or what the maximum IRA contribution level. Or whether it’s possible to get a tax deduction, pretty please! Don’t worry folks, I’ve got you covered.
Question #1: Is my contribution tax deductible?
The answer is: it depends. Your eligibility depends on your income, marital status, employment benefits and more. Depending on those variables, you’ll be placed into one of three categories.
No Tax Deduction
Contributions to a Roth IRA aren’t deductible. Not ever.
That said, contributing to your Roth account is still a solid plan. Just make sure your modified adjusted gross income (MAGI) isn’t higher than the Roth contribution limit.
Also, if you’re looking for tax deductions, then consider maximizing out your 401(k) or 403(k). These plans accomplish much the same thing as traditional IRAs in terms of taxation.
There are two scenarios where your contributions may be limited.
- If you or your spouse are covered by a retirement plan at work
- If you or your spouse fall outside the allowed income range
Remember, the IRS frequently updates income ranges, so double check the date before assuming you’re good to go. Better yet, consult an attorney.
Full Tax Deduction
You can deduct the full contribution amount from your taxes if both of the following things are true.
- Neither you nor your spouse have an individual retirement account through your employer.
- Your income(s) falls under the IRS cutoff point.
See above for information on income ranges.
Question #2: Can I contribute to an IRA if my retirement plan is covered through work?
Yes! You can still contribute if your employer sponsors your retirement plan. This holds true even if the plan is a SEP or SIMPLE IRA. However, be aware that there is a maximum contribution limit. Also, whether or not you can deduct the full contribution amount depends on a variety of factors which were covered in the first question.
What about if you aren’t covered by an employer retirement plan? You can still contribute to an IRA. Plus your contributions are fully deductible as long as your MAGI doesn’t exceed $60,000.
Question #3: Can I establish a self-directed IRA if only my spouse has earned income for the year?
Yes. If you file a joint return, you and your spouse can each contribute, even if only one of you has taxable compensation, regardless of which of you earned the compensation.
The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return and cannot exceed the maximum IRA contributions for the year ($5500 in 2017 or $6500 if over the age of 50).
Question #4: How can I contribute to my Roth account if I earned too much money in 2017?
The IRS has set the contribution cutoff at $181,000 for the year 2017.
If your modified adjusted gross income is below the cutoff point and you file a joint return, you can make a Roth IRA contribution. However, if you earned more than that during the year, you will see your maximum Roth IRA contributions reduced or completely eliminated.
One way to “get around” the Roth income threshold rules is to make an after-tax contribution and then convert it into a Roth IRA. Since the traditional contribution was made after-tax there would be no tax on the Roth IRA conversion.
Fun fact: This tactic was made possible when the IRS removed the income level restrictions for making Roth conversions in 2010.
Question #5: Can I contribute to my individual retirement account after I turn 70½?
It depends on which type of IRA you’re using.
You won’t be able to make regular contributions to a traditional IRA in whichever year you turn 70½. However, you can still contribute to a Roth IRA and make rollover contributions to a Roth or traditional IRA. This is always true, regardless of your age.